One of the occupational hazards faced by brokers is the fight to recover a commission after a transaction has been successfully completed. When a seller or landlord fails to pay the broker’s fee, the New York Real Property Law and, under some circumstances, the Lien Law, may offer protection, as well as leverage to help recover that which is owed.
In residential transactions, the remedy is afforded by Real Property Law 294-b, also known as the Commission Escrow Act. This law grants a “duly licensed” broker the right to record an affidavit of entitlement to a commission for completed brokerage services with the office of the county clerk. This filing requires the owner of the property who had an agreement to pay the broker’s commission to deposit the disputed fee with the clerk of the county where the property is located. Once the affidavit is filed, the property owner must deposit the funds with the clerk, who will hold the disputed amount in escrow until a court determines the broker’s rights. Should a property owner fail to comply with the deposit requirement, and a court subsequently rules that the broker was entitled to the commission, the property owner will be exposed to paying the broker’s legal costs, including reasonable attorney’s fees.
Although the affidavit of entitlement does not serve as a lien, will not invalidate the transfer of title, and still requires the broker to commence a legal action to recover the fee, by forcing the property owner to deposit the disputed fee with the clerk, or risk a judgment that includes legal costs, a stubborn holdout may be encouraged to simply pay the earned commission.
With respect to commercial lease transactions, Section 10 of the New York Lien Law permits a broker to file a mechanic’s lien for certain unpaid commissions. A mechanic’s lien is defined as a security interest in real property for materials furnished or labor performed in connection with the “improvement” of real property. Although mechanic’s liens are most typically associated with contractors filing for unpaid construction work, the Lien Law provides that services rendered by a broker to obtain a commercial tenant for a lease term of more than three years falls within the definition of “improvement.” Therefore, a real estate broker seeking to recover commissions withheld by a landlord may file a mechanic’s lien in order to force payment for a broker’s services.
In order for a broker’s lien to be properly recorded, the broker must: (1) have provided services to secure a ready, willing and able tenant under a commercial lease; (2) for a lease term of more than three years; (3) have a written agreement with the landlord, and (4) been denied full payment for the services rendered.
Unlike the affidavit of entitlement, a mechanic’s lien filed pursuant to the Lien Law will encumber the real property, preventing a refinance or a conveyance. Furthermore, if the landlord fails to make the appropriate payment to the broker after the lien is filed, the broker may enforce the lien by commencing a lien foreclosure action within one year of the filing. Like other mechanic’s liens, a broker’s lien will be subordinate to all prior recorded mortgages, but will have priority over a conveyance, judgment, mortgage or other claim against the property filed after the broker’s lien.
When used properly, the law affords real estate brokers and licensed salespersons with cost effective powerful tools to help aggressively pursue those hard-earned commissions.